Improving financial inclusion for the underbanked – creating growth while mitigating risk
When thinking of the underbanked, many think of the developing world and countries that don’t have sophisticated financial systems. However, a 2017 FDIC study found that over 24 million U.S. households were underbanked, as they “had a checking or savings account but also obtained financial products and services outside of the banking system.”
Just as with the unbanked, the lack of access to affordable financial services has significant impacts on the lives of the underbanked and their families, their communities and the financial system as a whole. Because their participation in the economy is limited, they are more likely to remain in a lower economic stratum and less able to contribute to, and share in, economic growth and prosperity.
Respondents reported a number of factors that explained their underbanked status, including lack of trust in banks, not having enough money to keep an account and the inconvenience of branch banking. While the lack of trust doesn’t have a readily apparent technological solution, there are mobile solutions that offer potential solutions for the costs and inconvenience associated with banking.
Consider some of the costs of banking: operating inefficient branch locations, dealing with legacy technology and relying on slow, manual processes all add to the costs of service, which are passed on to consumers. With more efficient, scalable solutions, service offerings that are more affordable to the underbanked are possible.
With a self-serve model and digital delivery, alerts, notifications and other ways to keep the consumer aware of their account status help avoid account issues and the resulting penalties. With better account personalization and more refined, AI-powered risk management, more appropriate credit offerings are deliverable, benefitting both bank and customer.
Digital and mobile banking also improve the convenience factor. Consumers need not rely on banking hours or spend time commuting to a branch to perform financial transactions. While branches do offer the advantage of face-to-face communication and an ability to build relationships and trust, many consumers prefer the speed and accessibility of a banking site or app.
The greatest market opportunity in fintech
Extending services for underbanked customers is not simply some type of goodwill effort, as there are significant opportunities for revenue growth. Angela Strange, a general partner at Andreessen Horowitz, calls it the greatest market opportunity in fintech: “This opportunity [to serve the underbanked] is massive. Depending on which numbers you believe there are anywhere from 2 to 3 billion people worldwide.”
If effective credit plans and other financial services are available to billions more people, what are the global effects? They can make more long-term financial plans, instead of going paycheck to paycheck. They can invest in education, resources, and goods and services to improve their lives and build a path toward prosperity. For example, they could start a micro-business, as the same mobile device that offers them banking is a potential conduit to developing, marketing and growing their own enterprise.
The effects are not limited to individual households, as there are numerous spillover effects. They can assist their family members. Their increased wealth helps the community, as they spend more money in the local economy. As the whole local economy grows, further expansion is fueled in a virtuous circle of economic growth. According to Diego Zuluaga at Cato Institute’s Center for Monetary & Financial Alternatives, “If we were to give the unbanked and underbanked in the developing world the same kind of access to credit and investments that we have in rich countries, you could easily create an additional $100 trillion in financial assets over the next 50 years.”
The long road ahead
While the opportunities are astounding, there are many obstacles and hard choices to make to get the underbanked (and unbanked) into the financial system. As mentioned, trust in banks is difficult to create in cultures that are wary of putting money into an institution. Even for people who are used to doing activities digitally, online banking is potentially worrisome, let alone for people who are new to the technology.
From the banking side, compliance issues are non-negotiable and strict standards make onboarding thin file clients risky; the same standards apply to customers that have a high lifetime value as to low value customers, so many banks are reluctant to accept the risk for the perceived payout.
Fortunately, as we point out in our post on the FATF guidance on digital identity, the risk of money laundering is generally less with lower value accounts; thus, having the same strict standards for all accounts is neither necessary or helpful. The FATF suggests that regulators reexamine their AML/KYC requirements to ensure that risk measures are appropriate to the risk level.
Effective digital identity systems offer the ability to minimize risks, such as money laundering, while improving financial inclusion. As Trulioo COO Zac Cohen, states, “assurance levels are key, and by providing structure and flexibility in how we can manage assurance levels (and still be in compliance), it opens the doors for greater financial inclusion everywhere.”